Last week's European stress test is by now, luckily, part of propaganda history. Easily the most ludicrous finding of the "test": all seven of Germany's largest Landesbanks, NordLB, WestLB , LBBW, BayernLB, HSH, Landesbank Hessen Thueringen and Landesbank Berlin, magically passed with flying colors. As the Landesbanks are at the same level (or far worse) of capital deficiency, courtesy of underwater and mismarked real estate assets accumulated over decades of lax lending practices and still marked at par, as are Spain's cajas (of which 5 were generously allowed to fail, although with laughable tier 1 capital shortfalls of a few hundred euros each), this finding alone is worth a few chuckles, for those who actually care. We won't speculate on the stress test any more - everyone knows it is a farce. Yet the role of the Landesbanks in European, and especially American markets, deserves a prominent discussion. And not just any market, but the very shadow banking system which at last check was vastly bigger than regular plain-vanilla commercial banking. As even the New York Fed acknowledges in its recent paper "Shadow Banking", by Zoltan Poszar, in which there is a whole section on the critical Landesbank function in the shadow economy, "As major investors of term structured credits “manufactured” in the U.S., European banks, and their shadow bank offshoots were an important part of the “funding infrastructure” that financed the U.S. current account deficit," the proper functioning of the Landesbanks is crucial to maintaining a stable and efficient market funding structure. This is actually extremely important, as for years most economists and pundits have considered only the non-shadow banking funding aspect of the massive US current account deficit (a topic most critical now that even the US is embarking on fiscal austerity, and the government sector will be unable to further fund the multi-trillion deleveraging ongoing in the private sector, thus pushing the topic of the current account to the forefront as Goldman did recently). Generically, everyone has always looked at China and Japan as those parties responsible for funding the US Current account deficit. Alas, that is only (less than) half the truth. As the New York Fed suggests, the shadow banking system is likely a more important economic funding factor than even China and Japan combined when it comes to the CA. Which is why the all time record decline of over $1.3 trillion in shadow banking liabilities should be a far greater warning sign than any month to month change in China's UST purchasing patterns, than whether WestLB is "really" broke or only "never never" so, and than the debate whether China will decouple, float or just continue posturing vis-a-vis the CNYUSD exchange rate. As everyone contemplates navels, a major portion of liability funding is literally evaporating as shadow banking implodes. Yet nobody bothers to discuss this most important to the future of the US economy topic.

For those who have not read the Poszar seminal and must read breakdown of the shadow banking system (an analysis we will discuss much in the coming weeks), and which he defines as: "financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees", the salient section discussing European bank importance, and especially that of the Landesbanks, in the shadow banking system is as follows:

Some parts of the “internal” shadow banking sub-system specialized in certain steps of the shadow credit intermediation process. These included primarily undiversified European banks, whose involvement in shadow credit intermediation was limited to loan warehousing, ABS warehousing and ABS intermediation, but not origination, structuring, syndication and trading.

The European banks’ involvement in shadow banking was dominated by German Landesbanks (and their off-balance sheet shadow banks—securities arbitrage conduits and SIVs), although banks from all major European economies and Japan were active investors. The prominence of European banks as high-grade structured credit investors goes to the incentives that their capital charge regime (Basel II) introduced for holding AAA ABS, and especially AAA ABS CDOs. As major investors of term structured credits “manufactured” in the U.S., European banks, and their shadow bank offshoots were an important part of the “funding infrastructure” that financed the U.S. current account deficit.

Similar to [Financial Holding Companies'] credit intermediation process, the maturity and credit transformation performed through European banks’ ABS intermediation activities were not adequately backstopped: First, while European banks had access to the ECB for funding, they only had access to euro funding, and not dollar funding. However, given that ABS intermediation involved mainly U.S. dollar-denominated assets, a euro-based lender of last resort was only a part of a solution of funding problems, as borrowed euro funds had to be swapped into dollars, which in turn needed willing counterparties and a liquid FX swap market at all times. As the crisis has shown, however, FX swap markets can become illiquid and dysfunctional in times of systemic stress. Second, similar to other shadow banks, the liabilities of European banks' shadow banking activities were not insured explicitly, only implicitly: some liabilities issued by European shadow banks— namely, German Landesbanks-affiliated SIVs and securities arbitrage conduits—benefited from the implicit guarantee of German federal states' insurance. European banks’ and other banks’ and nonbanks’ involvement in ABCP funded shadow credit intermediation activities is listed in Exhibit 12.

Of course, none of this should come as a surprise to anyone who has followed the Goldman Abacus scandal in depth: the primary dumb money recepticle of all toxic ABS and CDO exposure was long ago decided to be the German banks, which due to a regulatory arbitrage deriving from Basel II exemptions, and for other various reasons, discussed in the Fed paper, and on which we as well will touch upon in the future, were eager to gobble up any and every piece of structured debt biohazard to be kept on their "shadow" SIVs. After all they are off balance sheet - why worry? Speaking of, we wonder if Europe tested the tens of trillions in underwater assets held by Landesbanks on off-balance sheet vehicles - actually that is rhetorical.

But the issue here is much more nuanced. In essence, the Landesbanks, due to their very explosive holdings, are the German equivalent of our own bankrupt multi-trillion shadow bank extraordinaire: the GSEs - Fannie and Freddie, which served as the very basis for the creation of the entire US shadow banking system which at last count was $15 trillion - around $3 trillion larger than the non-shadow system (it is also likely hundreds of trillions globally, although nobody will stick out their neck with a near or even rough estimate). Just like our own GSEs warehouse around $7 trillion in "shadow" loans - implicitly guaranteed, but not "really" debt - just ask Larry Summers and Ben Bernanke, with an implicit but not explicit guarantee from the government, so the Landesbanks are in precisely the same position. Yet some could argue that the Landesbanks potentially have a far greater impact on the US economy due to their marginal impact as provider of current account deficit funding, than the GSEs, whose recent function has been merely to house hundreds of billions in securitized delinquent mortgage loans, and thus keep mortgage rates low, preventing an all out collapse of the US economy.

All of this must be kept in mind when considering that according to the most recent Z.1, the collapse in the US shadow economy in the quarter ended March 31, was unprecedented. The decline in shadow banking liabilities (defined as the total shares outstanding in money market mutual funds, the total liabilities of GSEs, total pool securities in the GSE mortgage pool, the total liabilities of ABS issuers, the total amount of securities loaned by funding corporations, the total liabilities of Repo markets, and total outstanding Open Market Paper: all of these can be found in the Z.1) between December 2009 and March 2010 amounted to $1.33 trillion! This was nowhere near even remotely offset by the $250 billion increase in liabilities of Commercial Banks. The full detail of the collapse in the shadow banking system is presented in the charts below.

The real question one should be asking, instead of the asinine debate over whether the Landesbanks are solvent or not (for the immediate answer, look no further than our own GSEs), is just how much of an impact on US current account funding will the massive deleveraging that is occurring in Germany have? And furthermore, if indeed German bank exposure via the shadow banking system is comparable, if not much larger, at least on the margin, to that of China and Japan, whose role in deficit funding via the non-shadow economy is well understood and extensively discussed, then what will the consequences of the continuing collapse in shadow banking liabilities be for America in the coming quarters and years? Because while the Fed may pretend to reliquify the market one day at a time using money that is stored at bank vaults, and never makes it into broad circulation aside from being used to purchase Treasuries, barrels of crude, and occasionally 3x+ beta stocks, the unwind that is occurring in the shadow system is, paradoxically contrary to its name, all too real, and orders of magnitude greater than the reverse reliquification process. Case in point: from its peak of $20.9 trillion in liabilities in Q1 2008, shadow banking has lost $3.8 trillion in liabilities in just the past two years. Indeed, over the same time period, liabilities of commercial banks have increased by $2 trillion. Which means that the Fed has been responsible for plugging the hole: curiously enough, the amount of securities purchased as part of the non-Treasury portion of QE amounts to roughly $1.7ish trillion. Merely a coincidence? In other words, with commercial banks unwilling to ramp up lending activity, and the shadow system vomiting risk each quarter, with a stunning $1.3 trillion flowing out in Q1 alone, should Q2 demonstrate a continued collapse in shadow banking lending, then the Fed will have no option but to get involved yet again, even if that means to merely plug the differential between the shadow and non-shadow system, as the inability to keep this necessary equality balanced would result in a collapse in the US current account funding, which in turn would kill the economy, absent yet another fiscal stimulus. In other words, the Fed's monetary stimuli do to the shadow economy what Obama's fiscal stimuli do to the plain vanilla backstopped deposit lending. And the scary conclusion is both reflation attempts are not only failing, but doing so at an accelerating pace.

Should the Q2 Flow of Funds report confirm another $1.3 trillion (or near) decline in shadow liabilities, it is pretty much game over, for both the US economy, and, when one factors the Fed's only logical response, for the US dollar.

Appendix:

1. Comparison of total Traditional and Shadow Banking Liabilities since the 1960s. The inflection point was Q1 2008, since which we have seen a whopping $3.8 trillion in liability reduction.

2. A detailed overview of the components comprising the $17 trillion US shadow banking lending market (the recent reclassification between GSE liabilities and GSE mortgage pool securities has been netted out).

3. And the shocker: the sequential quarterly change in shadow banking liabilities. The outlier is prominently noted.

It's all just a big-assed circle jerk designed to buy time in order to preserve the existing status quo. The bottom line is either humanity stumbles upon some new miraculous economic driver that will induce/encourage the global population to willingly contract new debt, or this fucker is going down.

The banking-political-bureaucratic triumvirate is absolutely committed to the current course of action because each benefits to a tremendous degree in their own respective fashion. However, like any three-legged stool, it's a very unstable arrangement due to the weakest link: the political leg.

If the central bankers are unable to create another publicly subsidized credit-leverage vehicle like Fannie, Freddie, Sallie, FHA, etc, AND successfully blow another illusionary bubble utilizing this tool, the political monster(s) may finally begin to show its face(s).

Once a new breed of true representatives are placed in power which did not benefit from the prior arrangement, then not only do they have nothing to lose (very important!), but they will also be propelled by the building public resentment & rage. (Jealousy & envy are two of the seven cardinal sins - never underestimate the power of revenge.)

That's why we haven't seen any indictments so far - each group is protecting the other. Shit, they probably quote Franklin to each other to remind themselves of their predicament. ("We must all hang together, or assuredly we shall all hang separately.") We will only live to see thousands of financial/political/governmental officials frog-marched if & when we get regime change.

I really enjoy ZH because it's just about the only place anywhere where anyone really gets what's goin' down. But still, it's also a bit of a waste of time. Either we get reflation, in which case it's "sayonara suckers" as the smart money loads up on every leverageable vehicle possible. Or, most likely, math, physics & logic prevail, in which case we get to live through "interesting times".

Being able to say "I told you so" & a $1.50 will only get you a coffee. The key is to be one of those who can articulate to the mob exactly what crimes were committed and why the culprits must pay (literally & figuratively, if you get my drift).

No amount of reflation is going to ignite the "consumer economy" which is now deader than a door nail. The consumer is going down as the middle class is being sucked dry. They may keep their scam going for a few years longer, but all too soon they will discover that that all that debt they heaped on the nation will not be repaid. There is no IF about our future, only WHEN. Pick a number, 1 to 5, that's how long we got, tops.

Hah! He doen't know it yet but he will be one of the first to meet the figurative guillotine that will soon make its debut in a town square near you. It can't happen here? Ya wanna bet yer life on that?

Isn't all this talk pointless? Everyone who pays attention, including investors, knows that banks are lying and deep in the toilet. The issue here is will they be allowed to realize those losses? No. That fact has been hammered home by the actions of the .gov over the last two years. They will print and illegally loan to prop them up. So in reality, all the talk about dead banks is mute.

Exactly, the banksters run the governments and the governments have guns. World governments will feed the monster off the backs of ordinary citizens while the gap between the haves and have nots continually expands until we are all serfs to the machine. No government, aligned under the new world order, will allow its banksters to suffer the mistakes they make in the name of greed. It is the way it is. Bernanke will print whatever is necessary to feed his bankster masters and the Congress will support them forever. It is a corrupt system. Deal with it.

You presume that monetary policy (combined with a complete lack of enforcement) can keep up the charade. The article should at least draw attention to the fact that monetary policy's sphere of influence is limited. In a vacuum (bubble?), maybe you would be correct, for a long time. The problem here is that their card is going to get pulled and the dynamic credit system is going to implode, forcing their hand. B9K9 had a good post in the open thread regarding this issue and where the stimulus money went... and why it went there... it's a losing proposition.

We are only in controlled demolition now... and soon it will give way to uncontrolled collapse. Apparently, god can create something too heavy for him to lift.

The goobermint could not "control" any of the bubbles that burst. The only issue they seem to care about is giving a few a "soft landing" at expense of the many. Kind of backwards in the "Vulcan" line of "the needs of the many outweigh the needs of the few ... or the one".

The fascists are not & have not always been in control. Sometimes, the time lapse between burst bubbles and new economic paradigms is too great. In fact, it could be merely a matter of years.

Look @ revolutionary France - it the royalty had just been able to squeak out another 10 years or so, instead of Napoleon, the Bourbons (with perhaps Napoleon as one of their leading generals a la' Patton) could have led the armies which conquered Europe.

In all of mankind's history, nothing quite satisfies & delivers the goods/services to the general public as does conquering foreign territory. I mean, look how long of a run both GB & the USA had from 1620 up until fairly recently. Christ, we show up with all of our fancy technology, and the only people here were wearing animal skins for doG's sake! Dang, it was like, "I think I'll be having that, thank you very much!"

The poor suckers who are gonna inherit our current mess will enjoy getting both a demographically altered & resource depleted husk in which to dress up & pretend to re-live the glory years. LOL

Btw, what MM was referring to was my comment on an previous thread that all this QE talk is utter bullshit. Monetary policy has very limited affect when credit represents around 99% of the total aggregate money-credit system.

The key is debt, debt & more debt. The fascists must, MUST first create another publicly financed credit leverage vehicle and then they must, MUST be able to successfully blow another bubble. Lacking either or spells doom; money by itself (QE) has no effect on credit leveraged purchases like houses, education, autos and other big ticket items.

That is why Ben correctly directed QE I towards propping up Fannie/Freddie, by far & away the single most critical component in this entire charade. (Second was equities, but only from an '"animal spirits" perspective.) Unlike his jawboning declaration, Ben did not shower money from a helicopter onto the public, and he will not do so, for the simple reason that money in the hands of individuals only means non-financed asset prices increase 1:1 in lock-step with money supply. (For example, food, gas, utilities, etc.)

Again, if the global herd cannot be induced into willingly contracting for credit (ie go into debt), and soon, in a mad chase for illusory gains, this baby is crashing. It is up to us, the informed & knowledgeable, to explain to the mob why the criminals must pay.

I just hope we have the wherewithal to bring them to justice. My guess is, by the time we get our shit together, they'll be long gone. And we'll be too worried about trying to relive our mistakes. It's a shame we have a hankering for the pound of cure instead of the ounce of prevention.

"induced", you say that like there is going to be a choice. Increasing taxes, decreasing services, increasing costs of every life critical commodity, decreasing real wages, cronic unemployment, decreasing health care quality

people are going to be put in a vise just to survive.

And who will be there waiting with the payday loans, credit cards, reverse mortgages, and student loans? All with new found enforcement and recovery laws, and repayment through gov service.

Re: time lapses. Another example, arguably the most significant one, is if the Ottoman Empire managed to last another 10-20 years. Then they'd have control over enough oil revenue to continue, and could conceivably be in charge of most of the world's energy today. The past 100 years would be quite different.

Getting involved on the losing side of WWI was an extremely expensive mistake.

It means soft default. Government will not honor promised disbursements from social security, medicare and other "trust funds" that collected tax money. They'll legislate away the liability through the usual tricks: raising age thresholds, phase ins, community rating, income phase outs etc... You won't recover your money cause it's gone...suckers

What a perfect analogy with the BP spill. As long as there's no oil on the surface everything is a rainbow of optimism. Yet underneath the surface lies millions of barrels of oil. The gulf underneath the surface is dead but everything looks fine from space. Thats what the global banking system looks like from the space between Ben & Timmy's ears.

Credit conditions are improving for speculators and bubblemakers, but they continue to worsen for households, consumers and small businesses. An article in the Wall Street Journal confirms that the Fed's efforts to revive the so-called shadow banking system is showing signs of progress. Financial intermediaries have been taking advantage of low rates and easy terms to fund corporate bonds, stocks and mortgage-backed securities. Thus, the reflating of high-risk financial assets has resumed, thanks to the Fed's crisis-engendering monetary policy and extraordinary rescue operations.

Here's an excerpt from the Wall Street Journal:

"A new quarterly survey of lending by the Federal Reserve found that hedge funds and private-equity funds are getting better terms from lenders and that big banks have loosened lending standards generally in recent months. The survey, called the Senior Credit Officer Opinion Survey, focuses on wholesale credit markets, which the Fed said functioned better over the past quarter." ("Survey shows credit flows more freely", Sudeep Reddy, Wall Street Journal)

In contrast, bank lending and consumer loans continue to shrink at a rate of nearly 5 per cent per year. According to economist John Makin, there was a "sharp drop in credit growth, to a negative 9.7 per cent annual rate over the three months ending in May." Bottom line; the real economy is being strangled while unregulated shadow banks are re-leveraging their portfolios and skimming profits. Here's more from the WSJ:

"Two-thirds of dealers said hedge funds in particular pushed harder for better rates and looser nonprice terms, and they said some of the funds got better deals as a result. ... (while) The funding market for key consumer loans remained under stress, with a quarter of dealers reporting that liquidity and functioning in the market had deteriorated in recent months." ("Survey shows credit flows more freely", Sudeep Reddy, Wall Street Journal)

As the policymaking arm of the nation's biggest banks, the Fed's job is to enhance the profit-generating activities of its constituents. That's why Fed chair Ben Bernanke has worked tirelessly to restore the crisis-prone shadow banking system. As inequality grows and the depression deepens for working people, securitization and derivatives offer a viable way to increase earnings and drive up shares for financial institutions. The banks continue to post record profits even while the underlying economy is gripped by stagnation. …

The Fed is paving the way for another catastrophe. …

The meltdown in subprime was the spark that set the shadow system ablaze.

Even so, Bernanke has fought all attempts to strengthen regulations, raise capital requirements, or tighten lending standards. Thus, the pieces of the shadow system have been reassembled with no fundamental change. Now it appears that the Fed's bubblemaking efforts are starting to pay off. Here's a clip from an article in the Wall Street Journal which clarifies the point:

"Even as lenders struggle to pull themselves out of the credit crisis, signs of a new and potentially dangerous infatuation with risky borrowers are emerging. From credit cards to auto loans to mortgages, the hunger for new business as the crisis ebbs is causing some financial institutions to weaken lending standards and woo borrowers who mightn't be able to pay...

“Credit-card issuers mailed 84.8 million offers of plastic to U.S. subprime borrowers in the first six months of this year...Fannie Mae, seized by the U.S. government in 2008 to avert the mortgage company's failure, launched an initiative in January that allows some first-time home buyers to get a loan with a down payment of as little as $1,000. ... The thawing securitization market for auto loans is helping AmeriCredit increase its loan staff and dealer network...Kathleen Day, a spokeswoman for the Center for Responsible Lending, said the consumer group is "seeing banks re-enter the subprime market at a steady clip and make loans to borrowers who don't have the ability to repay.

“There is no doubt that the credit supply still is tight. ... But some lenders are starting to take more chances on consumer loans. Many financial institutions that survived the credit crisis and resulting recession are desperate for earnings growth." ("Signs of Risky Lending Emerge" Ruth Simon, Wall Street Journal)

Financial system instability is no accident. It's Central Bank policy. As financial institutions discover they can no longer count on organic growth in the real economy to increase profits, (because consumers are too strapped to spend freely. They will rely more heavily on dodgy accounting, bogus ratings, opaque debt-instruments, high-frequency trading and lax lending standards. This is the shadowy regime that Bernanke is trying so hard to rebuild. The Fed is laying the groundwork for another disaster.

There's only a short distance between where we stand now and corporatism aka fascism. The unholy alliance between the financial sector and government is like bringing church and state together. Elite bankers may soon increase demands such as control over wages and prices paid. They hold the ultimate blackmail weapon, the sword of Damocles over the heads of middle class America and any politicians who oppose them: screw with us and we'll precipitate a collapse.

Good article but I gotta ask-is it smart or dumb money that is buying into the reflation of shadow risk assets? Sure these assets are back by the US sovereign but at this point the US has the credit credibility of an Argentina.

I like the stats, but the perspective is rather naive. We have been in Mellonesque liquidation for some time now, and here's how it's going to go in the future.

Americans have about $14 trillion left of realizable assets to loot (forget the ridiculous, marked to nirvana figure of $70 trillion or whatever they try to put forward these days). The upcoming purchase of securities is going to be $6.4 trillion, as of now. It was about $1.4 trillion in September 2009. But then as the year wore on, it was bumped up to $2.8 trillion.

But, as you have read, the situation has deteriorated. That's what this article doesn't point out. The collapse of shadow banking is now a good indicator of the collapse of economic activity.

As of May the amount was $4 trillion. Now it's $6.4 trillion and climbing very rapidly. I would not be surprised if, by October, it is in the $9-10 trillion range.

There has to be some counterbalance. This is what it will be:

The zero hour approaches. What is not very well publicized is that when the new purchase occurs (December-January) it will be accompanied by various types of Federalization of accounts. We have already seen some of this in various regulatory pronouncements and tucked away in various parts of the financial overhaul legislation. And some of it has quietly been put into place. Meaning? Meaning financial panic will not be allowed. They used to say, The revolution will not be televised. That was then, this is now. The panic will not be televised.

It's going to get very bad/be spun very well, and then the Feds will put all money market money (what there is left of it) in jail. Same with 401(k) plans. Same with pension assets.

The downside is, of course, that suburbia will immediately stop putting money in these things. But hey, we have been moving toward mattress stuffing for 3 years now. This will simply accelerate. But remember that it removes many of the mattresses between the U.S. capitol and the howling crowd.

Anyone who thought health and welfare regimes took liquidation off the table, is...well, entitled. So was the Czar. So was Louis XVI. I recall that they got quite a haircut.

But we are "all in this together," or similar twaddle.

But yes, the purchase of assets is about to increase very surprisingly and very explosively.

I am talking about FED buying Mortgages via money printing. Compensating Contraction in Private Credit by expanding Public Credit(debt) - Republicans want to shut these down which will cause austerity. Tax cuts, if it happens, will be a good sign - not sure of this since Obama may not sign it. Obama has already told that he will challenge the Republicans after the elections to solve national debt - via taxation and austerity?

Both Repubs and Dems seems to be in agreement about Social Security age raise, income threshold for SS etc - what are these ? austerity

December 2010 will be a good turning point in my opinion. Also capital gains tax go up 5% starting Jan 2011.

Next, although we have been repeatedly told that retail sales are
"dead", it appears that the association that produces the Retail Now
2010 annual trade show for retailers is COMPLETELY SOLD OUT!, as shown
here:

...are converging on L.A. (even as we bears and perma-gloomers
pound out missives of "This can't go on!, We're scroooooomed! and Any
minute now, I swear...") to demonstrate the latest movie, special
effects and animation technology.

Finally, I point to the world-record viewing (and record
advertising) of the World Cup bore-fest. Several BILLION viewers,
billions of fiatscos in advertising revenue, and
who-knows-how-much-beer-and-pretzels-consumed, all translate to a whole
bunch of people who obviously can't read the scroomage screeds being
screeched.

(Ras Conclusion): To be completely fair and accurate, the
"Sub-Prime is Contained" bust started THREE years ago, before the "Bear
Stearns Big Bang". So, it's been even longer than the two years I have
been counting as the incorrect "Great Disintegration".

Yet, as I have meticulously documented over these last few months,
overall credit has NEVER even stopped growing, much less reversed, the
vast majority of sheeps are still employed, stock markets are clearly on
the rebound, retail sales (especially of gimcracks) continue to
percolate along, whips and spoons are at roughly the same fiatsco prices
they were BEFORE the world supposedly fell apart, the U.S. fiatsco is
actually HIGHER than it was in 2007, Uncle Gorilla's interest rates on
Treasuries are LOWER, Fannie and Freddie are still pumping out MBS like
hotcakes, and the world has been--as much as I HATE having to admit
it--following Mauldin's "Muddle Through" path as if perfectly planned.

Week-after-relentless-week, month-after-excrutiating-month...year-after-grinding-year, and now decade-after-infinite decade, the
credit expansion continues.

Through thick and thin, boom and bust, recessions, "Great
Disintegrations", "Great Depression II", stock bubbles and collapses,
housing bubbles and collapses, commodities bubbles and collapses and
even sovereign country bubbles and collapses--over all credit continues
its unabated growth.

Don't believe me?

Well, again I point to the esteemed Doug Noland's latest "Credit
Bubble Bulletin", found here:

International reserve assets (excluding gold) - as tallied by
Bloomberg’s Alex Tanzi – were up $1.425 TN y-o-y, or 20.3%, to a record
$8.442 TN. "

(Ras Conclusion): Despite the constant screechings of even ol'
Rasputin that "Deflation is scrooming us all!", somehow, someway, over
all credit growth quietly continues its unremitting increase.

Furthermore, this credit growth has NEVER ONCE stopped or reversed
in the roughly three years since the McMansion/McMortgage bust first
started back in August, 2007.

And certainly not in the ensuing thirty years since a
then-greenhorn Rasputin was screaming "This can't go on!" when total
Uncle Gorilla debt hit one trillion fiatscos (and five trillion total
U.S. debt!)

So, if this is a "Great Disintegration", or "Great Depression II",
dont'cha think that credit would be CONTRACTING--and in a major
way--instead of continuing its ceaseless rise?

Finally, despite the massive increase in Uncle Gorilla's debt,
interest rates have plummeted to near-record lows. So, either the former
"Bond Market Vigilantes" really ARE now the "Fed Front-Running Pig Men"
of which I accuse them of being, or they are clueless exporters to the
U.S. who don't mind being bagholders of what will certainly be a bunch
of worthless IOUs.

Sorry bears and perma-gloomers, but once again--as they have been
doing for thirty full years now--the Alpha Thugs have rubbed my little
Rasputin snout in a pile of fresh fiatscos and completely embarrassed
and humiliated me for my running around with my hair on fire screaming
"This it it!"

And the facts and figures to back up the "Muddle Through" case are
irrefutable.

Collapses tend to come in cascading stages. Check. There can be an unpredictable time lapse in between. What often passes unnoticed is the shift in the underlying fundamentals that favored expansion at one time but have changed irrevocably.

Few are fooled by the EU stress tests. Look at a chart of 10 yr Treasuries ($tnx) where rates have fallen from 4% in April to 3% currently. Rates are making lower lows and lower highs. 5 day EMA below 20 day EMA. It appears rates are heading to 2% which is deflationary as money moves away from risky equities completely dependent on QE2. The great bull markets started when consumer and corporate debt levels were nil coming out of the depression. The conditions are nearly opposite today with massive private and public debt service levels. Nearly 10% of USA GDP is directly related to Fed deficits.

Here in SoCal I advertised to fill 4 positions asking for tradesmen to refurbish homes. I received over 100 applications from seemingly highly qualified people. They have general contractors licenses, 20 years work experience remodeling houses etc. These guys haven't worked for 12-18 months. They are so desperate for work that many have offered to work for free for a week to show me what they can do. I have tried 15 of these men on the job (not for free) and only found one that is actually proficient. My theory is that these guys are used to running crews from south of the border and don't really have any hands on experience. I'm worried that the misallocation of resources by the banks has left many without the relevant skill and knowledge to remain employed.

I think this is really insightful and a scenario I worry about myself as well -- that the misallocation and over-provisioning of financial capital has reduced the incentive (or even the requirement) for individual productivity and proficiency for long enough that the erosion in financial capital will be matched by the exposure of an erosion of the human capital of the United States.

If, societally speaking, we forget how to be productive in what seem to be the good times, from whence will come the impetus to re-invigorate the economy when we are faced with the bad times?

I've heard examples similar to your contractor example in the information technology and software worlds, and it also manifests in the articles we now see about many college degrees being overpriced, impractical wastes of capital, time, and potential talent.

It is equal parts sad, despressing, and terrifying for me to think about.

Yes. Why do you think not many Americans are into engineering, medicine, pure sciences or fields that require high levels of rigor ? And then we talk about outsourcing jobs that demand such skills to countries where the people pride on education in these fields.

Big conundrum for myself......when does the tipping point arrive when the panic to get out of fiat currency into "assets" ( ANY assets) occur? I think most of us already have the "fear" and maybe even the fingers on the trigger.....but still havent taken action yet.

Of course, none of this should come as a surprise to anyone who has followed the Goldman Abacus scandal in depth

Frankly none of this should come as a surprise to anyone active in the ABS market in the last 10+ years. The LBs have been sucking (hovering for the English) up structured credit deals with guaranteed funds for a very long time. This practice has been so prevalent (these guys used to be some of my best clients - good guys don't get me wrong) that when their guarantees were being phased out we created a structure for them to get grandfathered treatment on deals initiated after the phase out date (great trade BTW). From my perspective the European banks have always been the "dumb money" in structured finance/securitization. I put "dumb money" in quotes because given their mandate, the trades they made at the time and under the then present circumstances (high IG ratings, low cost CP funding, etc) they were not seen as dumb. From my perspective, the Asians (ex to a certain limited extent Japan) never really got into the securitization market with the exception of buying a butt-load of agency (fannie/freddie) securities. I think this comes down to an ability to operate effectively in the US. The Europeans could do it, but its hard for me to imagine a bunch of non-americanized Chinese guys sitting across the table discussing early amortization events for whatever master trust structure you were issuing out of.

The fact that it is 2010 and the Fed is just realizing this makes me think that they are stupider than I thought (not a very high bar). As a side note, one of the major reasons that sell off in risk that occurred in 2008-9 was so bad was that all of these European financial institutions had to go out and find dollars because their short term CP funding for all of these trades was getting yanked (hence the dollar swap lines opened up by the Fed). How would we do without the fed - its a double edged sword? Hmmmmmm.......

very good points - also, the crisis was exacerbated because they were using the repo market to take even more leverage on their short term funding. As I recall, the initial trigger came when the US banks demanded a higher haircut on the ABS (which they had sold them), which was the trigger point because suddenly there was not enough funding and they needed to start to de-lever.

You are correct no question, but from my perspective the big whosh came when the Reserve Primary Fund "broke the buck". That for me was the begining of the real run on the bank as ABCP got slammed (not going to even talk about those BS auction rate structures) and all of those bank backup funding facilities got called on. Personally a very busy day for me. Bought a lot of tresuries and pushed hard on my Fin shorts.

As a side note, one of the major reasons that sell off in risk that occurred in 2008-9 was so bad was that all of these European financial institutions had to go out and find dollars because their short term CP funding for all of these trades was getting yanked (hence the dollar swap lines opened up by the Fed).

We think alike. Read my post at the very top of this thread, and remember the Grayson-Bernanke chat. The question is, what is happening right now, and where? In what dark shadows are the newly printed USDs pooling?

If I had to guess (and running money for a living I guess I do), I would bet that the banks are doing the obvious, they are borrowing short and lending long in the US Treasury market. Honestly, I don't think this is any great mystery particularly given their RBC issues. Love for someone to prove me wrong (preferably before everyone else realizes it).

The purchasing of ABS by the Fed was chiefly done to save the shadow banking system, as people had started to withdraw money from money market accounts. The problem was that the SPV model requires short term funding from MMkts, who don't want to take the credit risk. In theory, the banks only take the credit risk (or earn the spread) without showing the balance sheet usage. Once the funding becomes too expensive, or non-existent, the banks have a huge fucking problem. Even the probability that the banks need to take the assets back on balance sheet would be enough the expose how under capitalized they were. If the Fed had not been willing to buy these assets, the whole financial system would have collapsed. These Landesbanks had a strict criteria for investing in securities, unfortunately, this was linked to the fraudulent rating agencies, who would have slapped AAA on a crack whore's ass for a $1,000 fee. I suppose the fallout of the exposure would have been disaster for the US financial system, so like with AIG, the Fed pays to make the problem go away.

One thing that does concern me is that Germany still doesn't completely appreciate the dangers of deflation. Since they have circled the wagons as seen by the (no) stress tests, they fail to realize that the highly leveraged economies of Portugal, Spain and Ireland especially will not generate the cash flows to service the liabilities backed by (non yielding) property assets. They either go down the route of inflation or they let the deflationary forces cause widespread defaults which means huge losses for banks (who have not syndicated debt in the way the US banks did) and how can the ECB cover these losses?

I think this Rasputin guy ignores the true story of credit, which can be seen in M3. The official data does not exist, but Shadowstats estimates it. Broad money supply is contracting, because the driver of credit has been the consumer and they simply cannot take on any more debt. There is no alternative borrow out there.

I think this Rasputin guy ignores the true story of credit, which can be seen in M3. The official data does not exist, but Shadowstats estimates it. Broad money supply is contracting, because the driver of credit has been the consumer and they simply cannot take on any more debt. There is no alternative borrow out there.

Don't disagree that credit demand is down, but I also think that supply is down as well for the very reasons that have been discussed (ie, no securitization). People focus on the banks too much and forget that the greatest driver of credit creation in the last 15-20 years has been the securitization/structured finance market. Unfortunately, I don't think it is coming back (other than agency MBS and central bank/gov sponsored transactions that will eventually end up on my tax bill) because you need a certain level of trust to get theses trades done. Trust in the rating agencies, trust in the monolines, trust in asset valuations. Unfortunately, I don't think that is coming back any time soon.

You know...it occurs to me that the very fact that a "shadow banking economy" even EXISTS is a serious fucking problem, in and of itself. Transparency? Accuracy? Jesus, even basic fucking honesty? Absolutely nowhere in sight, a sham, a lie, a puppet show provided solely for our further subjugation as good little slaves who will continue to trade our lives away for silly pieces of paper that only buy as much as the financial aristocracy deems necessary. If there are human beings who take thorough and complete pleasure in raping and murdering children, is it so hard to believe that there aren't those who would conscientiously and purposefully work toward the goal of selling you altruism with one hand while they use the other to grab for all the gusto that they can possibly hold?

In the context of the USA, just look at the progression of events in governance since the Revolutionary War...at that time, the government was established as a bottom-up system, wherein local and state authority had the say-so, and the federal level was organized just to make sure that we were all on the same page. No mean feat, especially when you consider that simple communication was accomplished by missives delivered via horseback messengers. Now, communication is instantaneous by comparison and we've grown into a top-down system in which a small number of people can make decisions that will literally ruin the lives of the very people whose interests they supposedly represent. I submit that the continued existence of the electoral college in this day and age, let alone the Federal Reserve and all of its clones and bastard-children across the globe, is proof-positive that we, and the very finite resources of the world in which we live, are being purposely farmed for no other reason than to allow an antiquated and thoroughly obsolete philosophy of "might makes right" to continue. If we're smart enough to split or fuse atoms, smart enough to trace the origins of the universe itself back to several fractions of a second after the big bang, then how come we're not smart enough to stop flinging shit at one another like the monkeys from whence we came? The self-righteousness and arrogance that we display, which is by no means coincidentally encouraged by our "leaders," is not only the fatal crack in the shiny armor of our pride and determination, but also the reason that our religious, political, and financial systems are complete and utter shit.

Why is there a need for "accounting" or "audits" or "Certified Public Accountants" if there if your bank balance sheet is alie, and those that want to invest in a company or financial house or bank is going in blind with no disclosure?

The financial and banking system is corrupt and f'ed up.

We would be farther ahead if we just destroyed the whole damn thing "creative destruction" and started over with a honest system SANS GOOBERMINT!!!

I hae been in a few industries, and have never seen such a corrupt and cheating system in my life.

Hell you know it is band when hookers and drug dealers are honest by comparision.

Hahaha, hence the inherent idiocy of the "too big to fail" bullshit. If a massive star can supernova and destroy the entire system of planets around it, then no measly corporation or government, regardless of the size of its balance sheet, is "too big to fail."

If we're smart enough to split or fuse atoms, smart enough to trace the origins of the universe itself back to several fractions of a second after the big bang, then how come we're not smart enough to stop flinging shit at one another like the monkeys from whence we came?

Laughing and crying at the same time. I hate you for being so bright.

Now, it's your job to answer this question. I say you partner up with some of the ZH smart guys, like Cognitive Dissonance, and put some solutions together that don't involve numbers.

Thanks, but I have some serious doubts about my intelligence, anecdotally speaking. But, I'm going to take you up on that one, if for no other reason than because its so goddamn depressing to watch this whole thing evolve the way that it has that if one is busy complaining without offering something constructive, then it's basically a masturbatory exercise at best.

Unfortunately, the best answer that I have at this point still rings the truest, after a good long time of thinking about it over the years. Essentially, it boils down to a simple lack of humility that runs rampant in our modern society. It's tempting and easy to shuffle blame somewhere else than it is to take the burden of responsibility onto yourself. Compounding that weakness is the fact that the "leaders" to which I referred before are more than happy to exploit that fact for their own invisibility and personal gain. The solution? Hoo, boy...ideally, it would be that the majority would simply ask themselves why it is that they believe that they are, in fact, better than anyone else on a personal level. Some things are easy to paint in black and white...torture, murder, child abuse, etc. All of the extreme cases, basically. Other things, well...not so much. That's when it really sort of requires some humble self-examination. On many levels, I'm a complete and total asshole, but not being so arrogant as to deny that fact is at least a small step in the right direction.

It's become clear to me that this so-called "financial system" has become such a complex Gordian knot that almost no one understands it. Strange, too, how its very fragility in a way protects it via the lack of understanding from routine panics. Sort of, "what you don't know can't hurt you." Until it does.

The train is heading downhill. The engineer has had a heart attack and the brakes have failed. A sharp bend is located at the bottom of the hill. And we're all wondering how can we jump off before it reaches the bottom.

Exactly...the very institutions that we created for our cooperative survival have now become the instruments by which, apparently, we will undo ourselves, thoroughly and completely. Such a shame, for all the truly brilliant ingenuity that we have displayed, and that's not a piece of sarcasm.

some good points but a bit unclear language, and i'm not sure which tables and line items in Z1 you are using. i suspect your $1.3b contraction in 1q10 might have been a $1.3b annualized pace of contraction, ie more like $400b of actual contraction during the quarter.

A couple of observations - in late 2008, after 24 months of permits and plan drawing and soliciting $ from investors, it was apparent that my good friends efforts to construct an ethanol plant in Nebraska were all for not. The price of oil had just crashed to $40 a barrel and the global economic meltdown was in full gear. All financing had dried up. Of course they were heartbroke as well as nearing economic "Broke". After reading this post it reminded me of how their last ditch attempt at obtaining the required couple hundred million (of course it never happened) came from high hopes in early 2009 from a new German bank who their $$ broker suggested named West LB. The Germans came to town and my pal was frantically scrambling to put the deal together. I had never heard of West LB. I remember thinking to myself, "how in the hell in the middle of this meltdown is anyone with deep pockets looking at financing a Nebraska ethanol plant".

They still have the land on the railroad tracks and the permits (expired) and the plans.

The other observation, after reading this, is Bernankes description (last week) of the current economic outlook. "Unusually Uncertain".

"If we're smart enough to split or fuse atoms, smart enough to trace the origins of the universe itself back to several fractions of a second after the big bang, then how come we're not smart enough to stop flinging shit at one another like the monkeys from whence we came?"

Thats how we got so smart. The guy on top doesn't have to breed more offspring than the guy on the bottom to pass on more genes. He can just kill the bottom guys offspring. 100,000 years of the top dog doing this along with having first choice of mates and this is where we end up. Smart, but not that smart.

Exactly my point..."Idiocracy" seems less and less a comedy these days. I wouldn't care, save for the fact that I actually have a daughter who's going to have to live long after I'm so much worm-food. Well, that's not entirely true...I'd be lying if I said that I didn't thoroughly enjoy the steady progress that our scientific pursuits have made. But, we've forgotten that, as a species, we really are no more or less special than any of the other dominant ones through the geologic record. If anything makes us stand out, it's that we're the first ones to be consciously complicit in our own destruction.

Hahaha, so well and good, save for the fact that the definition and personal experience of shame is as foreign to said recipients as the wheel was to the Mayans. What's integrity worth, so long as you can order up another fucking toga party?

This just shows how important for Bernanke to set up these currency swap lines whenever the dollar is in scarcity. He knows the game being played and he will play it to the very end when the civilization goes back to the stone ages.

Sorry Robot but outcomes, doings and threats are all different species. Achieving muddling through is only an accomplishment in deferral and containment.

Muddling through has most of the deflation unaccounted in balance sheets. It is all hold up in balloons in the stratosphere and will stay there as long as they can keep expanding the gas or stop it from leaks from becoming gaping holes in future debt servicing credibility. Outcome matters only on consumer credit reflecting what is going on in their world. Call it savings or call it paying back loans. One is choice, the other not necessarily so when collateral becomes ruled by a market and overhanging inventory of housing stock. 401K's go up because they must for anyone left working but mutuals buying is not healthy. Immigration cutbacks on job fears versus higher consumption & CAD debt growth - what is winning on the street? Politically the former hands down.

What is in the street is residual consumer optimism and can-do-ism born of post Pacific War American hubris. No Pacifc war no bubbling trade shows and conventions. Suggest you read alternate sources like the Pullitzer Prize winning bio on artist Willem de Kooning that straddled the 20's to the 70's to get a sense of the psyche.

What is in the wind however is militarist imperial adventurism reigniting the stalled war between North America and East Asia. The "arc of instability" around China is set.

David Ricardo. What you contributed is critcally important and I'm hoping you can help me understand what your wrote.♠

♠When you say "puchase of securities" what do you mean. What securities?

You said........The upcoming purchase of securities is going to be $6.4 trillion, as of now. It was about $1.4 trillion in September 2009. But then as the year wore on, it was bumped up to $2.8 trillion.♠

Why will it climb to the $9-10 trillion range? You wrote.....Now it's $6.4 trillion and climbing very rapidly. I would not be surprised if, by October, it is in the

There has to be some counterbalance. This is what it will be:

The zero hour approaches. What is not very well publicized is that when the new purchase occurs (December-January) Why December January? it will be accompanied by various types of Federalization of accounts. We have already seen some of this in various regulatory pronouncements and tucked away in various parts of the financial overhaul legislation. And some of it has quietly been put into place. Meaning? Meaning financial panic will not be allowed. They used to say, The revolution will not be televised. That was then, this is now. The panic will not be televised.

It's going to get very bad/be spun very well, and then the Feds will put all money market money (what there is left of it) in jail. Same with 401(k) plans. Same with pension assets.

The downside is, of course, that suburbia will immediately stop putting money in these things. But hey, we have been moving toward mattress stuffing for 3 years now. This will simply accelerate. But remember that it removes many of the mattresses between the U.S. capitol and the howling crowd.

Anyone who thought health and welfare regimes took liquidation off the table, is...well, entitled. So was the Czar. So was Louis XVI. I recall that they got quite a haircut.

But we are "all in this together," or similar twaddle.

But yes, the purchase of assets is about to increase very surprisingly and very explosively.

Sitting outside form here in Africa as a former Zimbabwe citizen it seems to me you should fear the fall of ponzi.humans are lot more ingenious than you think.

people mock Joe sixpack but if he knows intuitively the system is screwed and he is offered credit toys, a mcmansion along the way why not take it?

Its also the poor sweating traders who have wasted their lives for baubles having near heart attacks over digits on computer screens so that fat cats with private lifts (that they wannabe???!!!) can pons around in ponziland that I feel sorry for.

so if its all big scam/matrix figure out how you are going to game it and short circuit its influence in your life.

There plenty of cool places in the world that you don't have to share with the IRS and its endless surveillance - places that are too disorganised and the people focussed on other issues to care about regimenting everything.Also where ethics and trust still mean something

Seems to me the Land of the free and the brave somehow disappeared up its own arse - the parade of circus characters that have risen to the (supposed) top is really beyond belief.Being too US centric is a part of the problem why you have got yourselves in such a stupid jam in the first place.

Systems and monocultures are self limiting.I do not underestimate the death throes of a hyperpower and try stay out of the way see how i can profit.Russia the other superpower bust quickly and a menacing army and navy and air force imploded - perhaps that Rusky who predicted you would split into 5 group states again was not so stupid?

Think out the box i.e. USA -- your FRN's are still curently worth a lot and your skills are needed and you are still likely to find a warm welcome.... avoiding adventure was not part of forefathers DNA.Otherwise clean house and throw the bums out